March 10, 2017
Lumenpulse Inc. Resetting expectations lower
Our view: Lumpy quarters, limited visibility, and high expectations remain an issue for LMP. While the reduction in F2017 guidance is disappointing, we take a longer-term view and continue to see several drivers of revenue and earnings growth (though at a lower level than previously forecasted). Maintain OP rating, but target to $20 from $24 on lower estimates.
Key points:
F2017E guidance reduced due to “temporary volatility” – we take a more cautious approach and extrapolate this through our forecast horizon: Citing several factors, management noted that the pipeline of projects is not converting to orders at the same rate at which it has in the past. While they believe this is a temporary issue, we are taking a more cautious approach and have significantly reduced our forecast for revenue growth, and with this, our earnings forecast.
We still see several drivers of revenue and earnings growth: While reduced guidance does serve to reset expectations, we continue to see several drivers of revenue and earnings growth. Specifically, we forecast that revenue will grow at a 24% CAGR from F2017E-F2019E. This growth rate is in line with the demonstrated growth over the past several quarters, driven by continued market growth, new product introductions, and the cross pollination of regional products into global markets. We expect this top-line growth, combined with operating leverage, to drive EBITDA growth at a 58% CAGR through F2019E.
Comments on Trump/Tax/Trade: Current issues caused by the political changeover aside, LMP commented that they do not see a significant risk from potential changes to US tax/trade policy. LMP sources their electronics from the US, and while final assembly of LMP’s products is typically done in Canada, they do have assembly capability in the US (and this could be expanded for a relatively low cost if needed). Further, a stronger US dollar, increased economic activity, and an acceleration of infrastructure related projects should support LMP’s revenue growth.
FQ3/17 revenue, margins, and earnings slightly below expectations, though within the range of normal volatility for LMP: Revenue of $53.1MM increased 49% Y/Y, which was heavily supported by M&A. Adj. gross margins of 47.3% were lower than anticipated, and this resulted in Adj. EBITDA of $5.3MM, vs our $6.0MM forecast. Adj. EPS was $0.10, which was also below our forecast, though included a $0.03 FX loss.
LMP shares will likely continue to trade at a discount to the peers until a more consistent track record of growth is established: LMP trades at 10.9x C2018E EPS, below the peer group average of 14.2x despite much higher forecasted growth rates (even on our reduced outlook). As further (and consistent) revenue growth and margin expansion is demonstrated, we think LMP shares should narrow the gap to the peer group